Tax Resentment

One of the issues that seems to resonate with voters is that of
taxes. Nearly everyone feels that their taxes are too high. Even
those who have had the largest tax cuts in the past few years
still wish to see their taxes lowered.

Well, paying less taxes always sounds like a good idea, so why
is it so much a US issue and not such a hot button in other
industrialized countries? In countries like Sweden taxes can be
as high as 50% yet there is not the same type of anti-tax
resentment. The neo-con policies of Milton Friedman and followers
of Ayn Rand do not figure in main stream economic discussions in
Europe the way they do in the US. What is different? My answer
below:

My thesis is that people resent taxes in the US because they
are getting poor value for their money. In Scandinavia taxes pay
for child care, health and retirement services, generous
unemployment and child bearing benefits and even college
education. The people see where they money is going. Even though
many of these services are publicly administered these are
capitalist countries. Firms like Ikea, Nokia, Saab and Volvo, to
name just a few, are well known internationally. So generous
social programs and not at odds with free enterprise.

In the US the federal government has been reducing aid to
local and state governments. This has caused a rise in local
taxes (especially property and sales tax) which has furthered
resentment. Public sector workers are now being blamed as the
source of high taxes. There was much criticism of the transit
workers in NYC for making "too much" money. The same types of
remarks have been directed against school teachers. School taxes
are just about the only area where people can vote directly on
the issue via annual school budgets. Thus, this has become a way
for people to express their overall resentment. It is a strange
society where public sector workers making $40,000-$60,000 per
year are criticized for making too much, while those on Wall
Street make $100,000+ without comment.

So, if people are getting poor value for their taxes where is
the money going? The simple answer is into the military/police
sector. This sector now gets about half a trillion dollars per
year from the federal budget. This amounts to about 50% of all
discretionary funds spent. See this site for a nice graphic
showing the budget:

In addition there has been a large drop in the proportion of
the federal budget paid by corporate taxes. Corporate taxes
represented about 28% of federal revenues in the 1950's, they now
represent about 7%. The shift has been to personal income tax.
But this shift has not be neutral. During the Kennedy era the
marginal tax rate was 91% it is now down to 38%. What this means
is that the super rich are paying a smaller portion of the total
taxes than previously. The diversion of so much of the federal
budget into militarism has meant that not only are social
programs lagging other developed countries, but projects designed
to improve US competitiveness are being short changed as well.
Not only are many public works projects being neglected (New
Orleans being the current poster child), but funding for basic
research is lagging as well. Much of the recent work in genetic
engineering has come from elsewhere.

So, people know their taxes are "too high", but they don't
realize the trends that have caused this to be the case. Some sites
with interesting economic data:

"The wealthiest 5 percent have 59% of the wealth and pay 38.4
percent of federal taxes. The wealthiest 1 percent have over 38
percent of the wealth and pay 24.8 percent of federal taxes.
These households have an average wealth of $10.2 million and pay
only 3.5 percent of their wealth in taxes. By way of comparison,
the bottom 40 percent of taxpayers have an average net wealth of
$1,100 and pay 163 percent of their net wealth in taxes.
If all taxpayers paid the same 10.5 percent of their wealth in
taxes as median income families pay, the taxes of the lowest 40
percent would be cut by 94 percent while the taxes of the
wealthiest would triple."

The truth is that 90% of the US population is doing worse than
previously, or at best stagnating. Even though the evidence piles
up every day some people are slow to believe it. Just recently, for
example, there were items in the NY Times about the elderly having
to use their homes to pay for their retirements and students from
professional schools starting off with $150-200,000 in debt.
These are things that never existed before. Other stories about
loss of retirement and health care benefits are widespread.

Now if the proportion of income being received by the top
earners grows it is possible that the total amount they pay may
increase as well. Even the amount that they pay as a fraction of
the total receipts may grow as well. This does not prove that the
rich are paying for the poor, just the opposite.

I haven't offered any suggestions on how things
should be made more equitable. The British
did it via "death duties". There are risks of
allowing gross inequality to continue, including social unrest and loss of
economic efficiency. Many people think that they need to protect
the wealthy since they are in that class or may be within their
lifetimes. This is how the estate tax got abolished. Many people
thought they were protecting their estates, but actually they
weren't. Only the top 2% of estates are covered by the tax, and
the upward mobility into to the ranks of the super rich is much
less than it was decades ago.

Moral: Tax Resentment is misplaced. Blame the super-rich and runaway
militarism, not social programs for those in need.